Voice of the Industry

What is an ICO? Is it time for issuers to clean up their act?

Friday 15 December 2017 08:42 CET | Editor: Melisande Mual | Voice of the industry

Gordon Harrison, ICO Specialist at Jumio, argues that companies issuing Initial Coin Offerings (ICOs) need to act now to comply with AML legislation, before regulators force their hand.

What is an ICO?

One of the biggest recent developments in cryptocurrency has been the rise of the crowdfunding token sales, or “ICOs”, which have boomed as a way to finance development projects and launch new companies.

ICOs are reasonably straightforward to issue or take part in. A listing company invites supporters to send Bitcoin or other digital coins, credit cards or fiat currency to the organisation’s webpage, in return for digital “utility tokens”.

Utility tokens bought in an ICO don’t confer ownership – they are coupons that investors can redeem at a later date for access to the features of the project they’ve helped to finance. Token holders can also trade them on the open market in order to make a profit on their investment.

A booming phenomenon

ICOs have largely been unregulated in most international jurisdictions, allowing start-ups to raise money while bypassing the regulated capital-raising process required by banks and traditional venture capitalists.

As a result, ICOs have boomed in recent years, with a number of high-profile offerings. Mozilla co-founder, Brendan Eich, for instance, raised USD 35 million for his new web browser, Brave, in just 30 seconds, by selling Basic Attention Tokens (BAT) – these allow users to use the Brave browser ad-free.

The Canadian instant messenger, Kik, meanwhile, generated nearly USD 100 million earlier in 2017 selling Kin tokens. These can be used by holders to develop future Kik apps and bots designed to focus on the user experience.

Courting controversy

ICOs have not been an unmitigated success, however. In 2016, an ICO for a project, named deClouds, was labelled a scam after it repeatedly delayed the launch of its product, before disappearing without a trace.

Such scams have led to considerable international controversy. A key bone of contention for many regulators is the full transactional anonymity ICOs offer investors. This feature is very popular with many token sale participants, but doesn’t sit well with regulatory bodies.

This is because existing Anti-Money Laundering (AML) legislation revolves around “Knowing Your Customer” (KYC) – the concept of verifying the identify of an investor to ensure that they are who they say they are, and that their money hasn’t been acquired through corrupt or criminal means.

Reasons to comply

With this in mind, companies clearly need to ensure that their ICOs comply with the most stringent AML standards.

Maintaining a high level of KYC gives an ICO a seal of legitimacy, and goes a long way towards helping a company work with banks at a later date. It also enables companies to track their investors to prevent their projects becoming a conduit for money laundering.

Complying with regulations also helps a listing company demonstrate good governance processes and prove the integrity of their crypto-asset design. These measures further help to distinguish the ICO from scams like deClouds in the eyes of token holders.

Many regulatory bodies around the world are open to the idea of ICOs – the US and the UK in particular are looking to classify ICOs as securities. By proactively adhering to AML and KYC guidelines, ICOs can continue to operate in these large jurisdictions, and protect themselves from fines.

Taking action

When adhering to AML guidelines, above all, companies need to fully evaluate the identities of the investors purchasing their tokens.

Innovative online verification technology can help here. Incorporated into the transaction process, they can verify a would-be token holder’s identity to understand their profile, business and account activity. Such solutions are a cost-and time-effective way for companies to meet compliance requirements.

Advanced verification solutions can automatically search for any adverse information about an investor before the transaction takes place. This data can help listing organisations evaluate the potential for money laundering, so they can act to prevent suspicious individuals completing their transaction and implicating the ICO.

Verification typically involves asking for and validating an ID document, like a passport or driver’s licence as well as biometric facial recognition and liveness detection to confirm that the person on the ID is present at the purchase. Bank statements and other supporting documents can also be requested to provide an extra level of authentication.

Time to comply

It’s looking more and more likely that ICOs will come under the oversight of regulatory bodies in the near future.

Voluntarily complying now, before it is compulsory, will significantly boost the image and reputation not just of the issuing organisation, but of ICOs as a whole. Taking these steps now, companies can do their bit to secure the future of the ICO concept.

About Gordon Harrison

With a specialist expertise in Cryptocurrency and Initial Coin Offerings, Gordon Harrison serves as a Business Development Manager at Jumio, covering Financial Services and Sharing Economy in EMEA. He has worked in strategy consulting and business development throughout his career, having previously worked for Accenture and other technology companies. Gordon has worked extensively in Fintech and is passionate about using technology to create a better user experience in banking.


About Jumio

Leveraging advanced technology like biometric facial recognition, machine learning, and human review, Jumio helps customers to meet regulatory compliance including KYC and AML and tie the digital identity to the physical world. Based in Palo Alto, Jumio operates globally with offices in the US, Europe, and Asia Pacific and has been the recipient of numerous awards for innovation. For more information, please visit www.jumio.com.

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Keywords: Gordon Harrison, ICO Specialist, Jumio, crypto, cryptocurrency, Bitcoin, AML, BAT, Kik, KYC, Initial Coin Offerings
Countries: World